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Big Five & The Revolution

This might sound like a new band, but the title represents the “big five” technology companies: Apple, Microsoft, Amazon, Alphabet (Google), and Facebook, plus the technology revolution we are currently experiencing which continues to create innovative and disruptive companies. We are seeing a combination of the strong balance sheets and unstoppable growth of the big five, combined with startup companies that are creating new methods to do videoconferencing, provide online security, or even transforming the way we pay for things. These companies performed well, during the shutdown, as they were essential, but continue to do well, leading the surge of the stock market to higher levels. But this doesn’t end after a vaccine becomes available as companies and individuals will continue to utilize these innovative technologies. Remember when you can get grandparents getting comfortable with Zoom, then you can see how they will continue to use it or adapt more easily to using Facetime on an Apple iPhone. But when we look closer at these innovators you see even more amazing performance. This is what is unique about this pandemic-led recession where we see tremendous performance in one sector, technology, while the overall market lags behind by over 25% (YTD), most of the year, and has struggled to even stay positive.

We are well aware, and we speak often about the fiscal and monetary stimulus that has created a support level for our economy, almost to the point of guaranteeing that we won’t go lower. We expect another round of stimulus in the next few weeks, that will basically create another level of support for the stock market. Our previous notes speak often about our concerns that we are addicted to printed money and low rates as we have been doing this since 2009. If we are going to create a continuous flow of “helicopter money” and provide it to all businesses and people forever, then we have nothing to worry about. But that is impossible, and we know that. But we decided to focus on what is really positive out there and what is making a pandemic seem like just an inconvenience for many people. This is an important comment we want to make here and that is we do not mean to make light of people that have passed away from COVID-19 or have suffered from being sick or even lost their jobs, that has created financial difficulties for many. Our goal here is to focus on markets and our job is always to manage wealth and uncover opportunities. And most of you are well aware that we have been on the technology revolution theme for many years, which is reflected in our portfolios and performance. If this was 2008 and we had the same pandemic, the outcome would have been much worse. Besides the fact that the fiscal and monetary stimulus came much later during the financial recession of 2008, while this time, the reaction and delivery of helicopter money was quick. But the other reason is that this pandemic-led recession was easier to handle which was due to the advanced technology that we have, as companies transitioned employees to their home offices, providing cloud services and cybersecurity, while grandparents were having Zoom parties, and millennials were on a Peloton exercising as their gyms were closed.

The Big Five Continue to Dominate

Now, let’s analyze further on how the big five have dominated this market recovery since March 23rd. The first chart below points out how three of the five companies have now surged higher than $1.5 trillion in market capitalization. The last column of this table also shows that the total percentage of these five companies now represents about 23.0% of the entire S&P 500 index. If you are not aware, the S&P 500 index is constructed by market-cap size (value of outstanding shares), so Apple gets the highest weight in the index, and so on. At this point you can ask the question, “so what?”. Well if the entire S&P 500 is up only 2.9% YTD (as of 8/5) and the top five companies are, on average, up about 28% each, for the year. I think its quite evident how badly the other 500 (505 in total index) stocks are doing this year and how important these stocks are to the overall market, or the S&P 500 would be much lower. And then when you consider that these stocks play such a major role as top holdings in so many ETFs and mutual funds, you can clearly see the important influence these stocks have. But let’s face it, these tech behemoths have the strongest balance sheets, with tons of free cash flow, low debt, huge market share, and continuous annual growth.

The second chart below compares the YTD performance of the big five versus the S&P 500, and again its quite evident how these companies are a big part of the market recovery this year. Now the question that has been asked since late March is, when does this leadership weaken and we have a re-emergence from other sectors. This is a common theme annually, since 2009, as the technology stock bears keep calling for their demise. We did see a reversal of tech leadership, in late 2018, during the 3Q of 2019, and also a few weeks ago. But we continue to see and we strongly believe that this shift in leadership is temporary and it eventually resets, as these companies are so strong and continue to dominate their specific areas within the technology sector: Apple (phones, desktops, services, music, “image”, etc.), Microsoft (software, Azure cloud service, etc.), Amazon (online seller, AWS cloud service, entertainment, etc.), Google (online search, Android phone O/S, online advertising, driverless technology, cloud, etc.) and Facebook (connects 2.5 billion people on its app, online advertising, social media apps, virtual reality, etc.). So as its clearly shown, these companies are so powerful in their respective spaces and continue to reach out to enter new industries, which makes other companies always uncomfortable when one of these five even consider that move. There is also more recent talk about splitting them up, but I don’t expect that to happen. In reality, if you broke them apart, they would actually gain more value, as their parts are quite profitable. For example, Azure and AWS are currently the two biggest cloud companies with annual growth in the 50% range. This debate of breaking them up will go on and they will also be used as a political ploy. So, the focus on these companies will not change and their valuations will remain in the spotlight. We believe that there will be an occasionally shift in leadership, but the market will keep rotating back to them, as they are needed to lead this market higher.

Big Five vs S&P 500 YTD


Market Projections

We have experienced an amazing market recovery since March 23rd that was sparked by the onslaught of trillions of stimulus and liquidity. But as we saw the economy slowly recover with caution, the big five charged ahead leading an entire sector to all-time high levels. This has created a major dislocation between technology and the other sectors. But as the S&P 500 is approaching its all-time high close of 3386 on 2/19/2020 we are seeing strong resistance in the overall market. And it makes sense, as the market cannot justify a new high as we continue with a pandemic that is still quite active, even though it seems to have mutated somewhat. Also, we still have a high unemployment rate that is affecting a large group of people who were employed in jobs where technology was not a major factor. Now the administration and Congress are struggling to pass another stimulus package as both sides hunker down, and realize that the government credit card is full, and let's face it, we have an important election coming up. The market will get nervous the longer it takes to pass this stimulus package, and it will eventually go through. Earnings season is practically over and the damage was not as bad as expected as we did have some nice surprises among the big five. We saw a huge negative GDP number reported but everyone was expecting it and so we did not see any major shocks.

So we see a market that will continue this path, as shown below, where we go higher, reach a sideways trend channel, and then go higher to test another level. As the 3386 level is major resistance, we see a sideways path until September, or until the stimulus is passed. But even if we jump above 3386, it would not be surprising to see another pullback in the next month or so. The major catalyst behind these surges is liquidity and as long as that is available and there are few options to achieve a meaningful return, stocks will go higher eventually.

S&P 500


Obviously, if we get more positive news on the COVID-19 vaccine testing that will be a good thing, not only for health reasons, but this market is craving any positive news. We don't expect much election volatility heading into the last few months of the year. We believe there is a good possibility for a final push higher and especially if we get a vaccine coming in December or early 2021. Even though the market P/E, or valuation, is higher than normal, the low interest rate environment and the massive liquidity creates a lot of support which could lead to a catapult-like launch into 2021. We do expect next year to be more stable and positive, unless we saw negative news and a rise in COVID-19 deaths, due to a continued high level of new cases. The market has even digested a probable win by Biden, but is more concerned about a Democratic sweep in Congress, which would translate to a rollback of the 2017 tax cuts (portion of them). But the market is seeing that a Biden win could lead to more stability with regards to the pandemic and the economy. A Trump victory would also be a positive for the market as long as the deficit is addressed as we cannot keep printing money at this pace and keep giving more tax cuts without considering the future consequences. Both parties would look very positive with the adaption of a infrastructure plan.

In our strategies we continue to favor technology, but on an individual company basis as we focus on active management. We are starting to see more favorable opportunities overseas. The VIX (volatility index) is still trending on a downward pace, which is positive, even with the occasional pops higher. We see rates for the 10-yr. Treasury remaining in the same range it has been following the last few months. The Fed will keep the Fed Funds rate near zero until 2022, as they have stated so, which clears the runway for more upside for the market, even if we see higher taxes overall. In reality, this recession was induced by a pandemic and not indicative of a weak economy. We remain bullish for the rest of the year and heading into 2021. We are quite concerned looking farther out, if we do not see actual fundamentals, like earnings and revenue to validate these upward moves. As mentioned earlier, we cannot live on printed helicopter money forever or we will have serious problems at some point.

If you have any questions or to discuss one of our five individual strategies, please contact us. We did create two new models several months as shown below.


This portfolio is a total return strategy that seeks to outperform the market by capturing dividends to enhance its returns. The focus is on total return and the size of the dividend is a secondary option.


Insight Opportunity is a portfolio that seeks to capture the best companies that are leading the technology revolution. This is an aggressive strategy that will provide an opportunity for higher returns due to the companies that will be held. Positions will be held on a longer-term basis and the only hedge we will use is an increased cash position under extreme volatility.


John Anagnos

Managing Principal

Chief Investment Officer


3828 Kennett Pike

Suite 212

Greenville, DE 19807

Office: 302-543-4446 Fax: 302-510-4166


Aetolia Capital, LLC (“Aetolia”) is a Registered Investment Advisor ("RIA") registered with and resident of the State of Delaware. Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Aetolia renders individualized responses to persons in a particular state only after complying with the state's regulatory requirements, or pursuant to an applicable state exemption or exclusion.

This communication is intended to provide general information about Aetolia. It is not intended to offer investment advice, or to offer or recommend the purchase or sale of any securities or investment product. Investment advice will only be given after a client engages our services by executing the appropriate investment services agreement, and shall be subject to the terms and conditions therein. Information regarding investment products and services are provided solely to inform the reader about our investment philosophy, our strategies and to be able to contact us for further information. Please do not forward or replicate without our permission.



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